Inequality Matters

"All animals are equal, but some are more equal than others" - George Orwell.

On Thursday 6th April 2014 Debbie Abrahams, MP for Oldham, rose in the House of Commons to highlight a shocking failure of the coalition Government's welfare reforms. She described in harrowing terms how a diabetic ex-soldier had been found dead in Stevenage shortly after having his benefits stopped. He was surrounded by job applications and, according to the post mortem and subsequent police report, he had an empty stomach having not eaten for days. He was penniless ,without even enough money to run the fridge and keep his insulin cool. It was a shocking moment prompting over 200,000 people to sign a petition demanding an investigation.

The soldier's story broke shortly after the exposure of a Jersey based tax avoidance scheme enjoyed by, amongst others, comedian Jimmy Carr. Prime Minister David Cameron accused Mr Carr of being "morally wrong" and called on him and all those involved to repay the tax avoided. The FCA also issued statements about challenging similar schemes in future.

Without a hint of irony the Government then appointed Sir Philip Green to look at ways of saving more money in the Public Sector (he was apparently telephoned in his £16,000-a-night villa in Barbados to be asked, but I cannot confirm this). Green belonged to a growing number of Establishment figures who had been avoiding much more than Carr for years and had regularly avoided Corporation Tax through several ingenious avoidance schemes established by the 'Big Four' accountancy firms.

Hang on though, that's OK isn't it? Isn't that what we financial professionals are paid to do?

Many Financial Planners have pasted quotes from past legal case summaries into their reports to justify how sound tax planning is not only legitimate but essential for financial security - and most would be affronted if any link between benefit cuts that led to an unfortunate soldier's premature death and legitimate tax planning was implied. Rightly so...but in an age of austerity, where money is tightest, they are undoubtedly linked; and more than that they highlight the growing sense of unfairness and inequality that threatens not only the lives and well being of millions of the poorest but also the very structure of our own industry.

I would argue that growing inequality has eroded many of the values our great profession was built on. I believe it has negatively influenced many basic aspects of the advice process including managing risk, anticipating investment returns, the provision of real financial security and the general affordability of advice.

You won't need me to point out the problem. The recent Oxfam report highlighted how the richest 1% are close to owning more than half the world's wealth - but more significant in that report was how vastly unimaginably capacious the wealth of the top 0.01% has become.

Since the late seventies, when the Free Market theory of Economics returned to favour, the control of the Money Supply has ensured that when wealth separates it leaves a cruel wake. A growing strata of the now Uber rich has to be balanced by a new underclass of the poor and this has been the case almost everywhere: divides between continents, countries, regions and even within cities.

The city of Nogales straddles the United States-Mexico border in Arizona and Sonora. Those in the Northern part are in the US, those in the South are in Mexico. The differences between the two are frightening. Average wages in the North are around $30,000 a year. In the South they are closer to $10,000 - in the same city. Infant mortality is higher in the southern sectors and life expectancy is considerably shorter...yet only a fence divides them. Nothing highlights globalisation and its inherent inequalities quite so starkly.

Our industry grew out of helping those people like the families in the south of Nogales. The home service tradition of United Friendly, Pearl, Prudential and others allowed people of lesser means to access a financial system that gave them the potential to save, with their money protected, and enjoy investment style returns over time. Even the premiums were collected at the door weekly and recorded manually in books. The books were prized, cherished and guarded.

I suggest that today very few of our industry would waste much time in south Nogales. These days we have dropped words from our company names like "Friendly" and they have been replaced by monikers more appropriate for the modern financial world like "Wealth Manager". It is clear where priorities lie. Avarice has triumphed. Greed is indeed good.

Change happens and evolutionary economic theory propounds that you must adapt or die. We have all adapted. That's business. Maybe even good business.
But are there other unseen threats from inequality and unfairness?

You may have some knowledge of the "Six Degrees Of Separation" principle explored by Stanley Milgram in the 1960s which suggests that things are often more closely linked than we think. Milgram sent 160 letters out all over the USA at random asking people to send them on to someone who they thought might know the address of a named stockbroker in Boston. Most letters made it having been re-sent 5 or 6 times.

Why does that matter? Well, with so much data available to so many of us now you might be forgiven for thinking that constructing a safe portfolio for a client with appropriate non-correlated assets is easier than ever? Achieving a healthy degree of separation between asset classes in the investor's interests just a matter of astute selection using computer models?

Well one recent example shows just how vulnerable we all are now. The Hunt family in the US sits squarely in the top 0.01% of the richest in the world. They are, amongst many other things, cattle ranchers and use the futures markets all the time to protect their valuable investment in Beef. When the market moved against them recently sending the price of Beef down unexpectedly they faced margin calls on their futures positions. The figure was in the billions. To cover the call they sold furiously...in the Silver market. They took some of their widely diversified wealth and focused it.

So wealthy were the family that their significant foray created a correlation between Beef and Silver in the markets. Smaller investors paid the price. This distortion was caused, quite simply, by too much investment wealth being focused on too few people. They literally cornered the markets they were in.

This danger is now omnipresent, as the few families with the power and influence to match that of the Hunt family use their wealth to protect their own interests in a similarly focused way.

Best estimates by economists suggest that the gap between any two financial institutions today rather than being around the 5.5 degrees of separation of Milgram's time is now more like 1.4...We saw the effect of this in the banking crisis of 2007 and 2008 and indeed with several so called "protected" products afterwards.

The Free Market argument is that a rising tide lifts all boats. Give money to wealth creators and they bring factories, jobs and prosperity. They pay taxes, invest in communities and fuel innovation and technological improvements. The rich get bigger slices of the pie but everybody benefits from a bigger pie.

Yet thirty five years in to Milton Friedman's great economic social experiment this argument is being exposed as illusory. Never mind that for traditional smaller equity investors the FTSE100 index remains stubbornly below its 1999 high or that many of the old guarantees - with profits, defined benefit pensions, guaranteed annuities - have been replaced by lightly regulated riskier alternatives. It is even bigger than that.

Deregulated markets have benefited owners of capital alone. Stratospheric rises in executive pay have been unchallenged following the suppression of trade unionism and growth in global collaboration between elites. Corporations can get richer quicker with less regulation whether that is by sacking workers more easily, paying them less, exploiting the environment or just by having an unchallenged monopoly. Worse the introduction of private corporations into lucrative public services has seen unprecedented public spending of boom time receipts on schools and hospitals end up, not in the accounts of teachers and nurses, but in those of chief executives and share holders.


Since the 2010 election, five years of austerity has subsequently taken unparalleled amounts back out of public services and the State, cutting welfare, education and health even at a time when billions more have been made available and used to buy up securities from troubled banks under the guise of Quantitative Easing. This blatant re-distribution upwards, albeit in the belief that it will deliver results eventually, has been accompanied by political rhetoric suggesting the pain is spread evenly.

So are we really all in it together?

In fact inequality grew in 16 of the top 20 countries up to 2013 following the financial crisis. Growth has stalled. Inadvertently policies intended to produce wealth and bake a bigger pie have actually half-baked a smaller one and given most of it to the wealthiest.

The question becomes: as advisers who do we help and who should we help? As explained above, even our wealthier clients are vulnerable, unless of course they are fortunate and wealthy enough to sit in that group which owns the largest slice. Inequality puts pressure on the individual's ability to save. It leads to reductions in demand as households struggle to afford goods...so corporate profits fall, followed by share prices and then investment returns.

Then on a selfish level there is the "tarnished by association" issue as advisers become vilified as belonging to the same group as the avaricious bankers paying huge bonuses from taxpayers bail-outs. It's a tough time to be an adviser.

When IFAs moved to fees it was welcomed and heralded as the re-birth of our industry as a profession - we are all New Model Advisers now. Yet in doing so we created a vacuum of advice, neglected some of those who always needed our services most and abandoned an efficient cross-subsidy system that allowed excess profits from some clients to be spent servicing the less profitable.

Our world has changed over 40 years. We have swapped a world of relationships with the hard-working looking to save for a better future, offering carefully structured products designed to give reassurance and reasonable long term returns at the expense of flexibility and transparency and embraced one of post-Black/Scholes investment analysis, stratified sampling, an infinite fund universe, rapid arbitrage and transparency that obscures more than it reveals.

We may even stand accused of perpetuating inequality, though that is perhaps a step too far. Nevertheless inequality continues to gather pace and the poorest are turning to extremist politicians, radical imams and islamists, even anarchy to find some hope.

One outcome of course is an off-the-scale correction. A seismic financial event so catastrophic that it will literally re-draw frontiers and see the death of the Free Market as a viable economic policy. It has happened before. History tells us that great inequality normally ends painfully whether it be empires collapsing or last century's two great global conflagrations that led to the establishment of our own modern welfare state.

As advisers we each have a contribution to make by shunning immoral tax avoidance schemes, working in less affluent communities to assist them with saving for the future, encouraging ethical investment, lobbying for better product design and demanding more shifting of risk from the shoulders of clients onto the shoulders of companies that are better equipped to cope.

I often think of that poor man dying alone in a cold flat. One of the best advisers I ever recruited was an ex-soldier. He had seen the worst of humanity and felt qualified to share in the best of it - he saw honour in helping others in adversity through objective unbiased financial planning. He saw it as a noble challenge.

One challenge which I am certain we are all equal to.

Well perhaps some more than others.